Introduction:

Section 194 of the Income Tax Act, 1961 outlines various subsections for the deduction of income tax on specific expenditures exceeding certain limits. Section 192 of the Act specifically addresses the deduction of tax on salary payments made by an employer to an employee.

Defining “Salary”:

Under Section 17(1), the term “Salary” includes various components:

1. Wages
2. Annuities or pensions
3. Gratuity
4. Fees, commissions, perquisites, or profits
5. Advance of salary
6. Payment for unavailed leave
7. Contribution to recognized provident funds
8. Interest on provident fund balance
9. Transferred balance in a recognized provident fund
10. Contribution by the employer to a pension scheme under section 80CCD

It’s important to note that lump-sum payments to the widow or legal heir of an employee who dies in service are not taxable.

Dearness Allowance and Bonus:

Dearness allowance is considered an additional payment for the high cost of living and is taxable under the “Salaries” head. Bonus, when paid under a service agreement, the Payment of Bonus Act, a trade association decision, or a labor tribunal award, is treated as salary. Gratuitous bonus payments without legal or contractual obligations are considered a perquisite.

Deductions from “Salaries”:

Section 16 of the Income Tax Act allows for deductions from gross salary:

1. Standard Deduction: Introduced by Section 16(ia), it’s Rs. 50,000 or the amount of salary, whichever is less.
2. Entertainment Allowance: Deduction is permissible based on specific conditions under Section 16(ii).
3. Tax on Employment: Deduction allowed for professional tax paid by the employee under Section 16(iii).

Tax Deduction at Source (TDS) from “Salaries”:

Under Section 192, if an employee’s estimated annual income under the “Salaries” head exceeds the maximum non-taxable limit, the employer is obligated to deduct TDS on salary payments. This includes an estimate of total emoluments, considering increments or arrears expected during the financial year. If an employee works under multiple employers, they can furnish details using Form No. 12B.

Additional Considerations:

• Employees with income under other heads should provide details to their employer.
• Government employees eligible for relief under Section 89 can furnish particulars in Form No. 10E.

Conclusion:

Proper understanding and compliance with tax deduction on salary are crucial for both employers and employees. Deductions, allowances, and TDS play key roles in the taxation of salary income. Employers must diligently calculate and deduct TDS, while employees should ensure accurate reporting and claim deductions when filing income tax returns.